Fund industry introduces new ‘responsible investment’ definitions

The Investment Association has tried to clarify the complexities of sustainable and responsible investment with a new set of industry-wide definitions.

In an effort to provide greater clarity and consistency in the highly subjective area of ethical/responsible investment, the Investment Association (IA) has today published an industry-wide framework of terms and categories.

The aim is to make it easier for investors to navigate this rapidly growing part of the retail fund market by introducing a common language and clear product categorisation.

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At present, the wide range of terms and phrases used make it very difficult for people to understand what the choices are and compare funds, or to be sure what they are buying is in line with their own ethical principles. These terms include “environmental, social and governance (ESG)”, “sustainable”, “ethical”, “socially responsible (SRI)” and “impact” investing.

At the start of 2019, the IA launched a consultation with fund managers across the industry; more than 40 firms responded, representing £5 trillion of assets. Of those, 85% supported the idea of an industry-wide set of labelling.

The IA’s new label encompassing the full suite of approaches covered is “Responsible investment”. The responsible investment framework makes a distinction between “firm-level components” – the way an investment group as a whole approaches responsible investment – and “fund-level components” that distinguish individual funds.

There are several top-line components.

Stewardship:The responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries, leading to sustainable benefits for the economy, the environment and society.”

ESG integration: “The systematic and explicit inclusion of material ESG factors into investment analysis and investment decisions.” This does not prohibit any investments – an ESG strategy could invest in any business so long as the ESG risks involved were taken into account.

Exclusions: The prohibition of “certain investments from a firm, fund or portfolio”. This might be on the basis of ethical values, or sustainability considerations – for example fossil fuel producers might be excluded. Or a fund might exclude the worst-performing companies in ESG terms, relative to their peers.

Sustainability focus: This includes “sustainability themed investing”, for example selecting companies that actively focus on working against climate change. It also includes “best in class” approaches, for example looking for companies with the lowest carbon footprint among their peers.

Impact investing: “Investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” These might be in the shape of social bond funds, or investments that focus directly on unlisted projects or initiatives.

Chris Cummings, chief executive of the IA, said: “One significant barrier to the growth of responsible investment has been the lack of a common language and framework that describes and categorises these approaches and products. The agreement of industry-wide definitions provides consumers with that much-needed clarity and choice.”

In 2020, fund managers will be asked to indicate which of their funds should be labelled as having responsible investment characteristics.

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Moira O’Neill, head of personal finance at broker interactive investor, Money Observer’s parent company, welcomes the initiative as “an important milestone”.

However, she points out that “the new common language being spoken has evolved little from where we are today - many investors will be unable to speak it. Words like ‘positive tilt’, ‘sustainability themed’, ‘private impact investing’, ‘SDG Funds’ and ‘norms’ are classic ethical alphabet soup.”

O’Neill also highlights the potential risks of firms self-classifying their funds on the basis of responsible investment. “We would have liked to see an independent body making calls on how rigorous an ethical policy is, rather than leaving it to the managers,” she comments.

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